Capital expenditure in India- THE PUBLIC SECTOR GAP In Centre’s CAPEX Spree

Source: The post capital expenditure in India has been created, based on the article “THE PUBLIC SECTOR GAP In Centre’s CAPEX Spree” published in “Live mints” on 29th February 2024.

UPSC Syllabus Topic: GS Paper 3-Indian economy-mobilisation of resources

News: The article discusses the Indian government’s increased spending on capital expenditure (building assets like roads and bridges) over recent years. It explores where the money is spent, how it’s changing, and its impact on economic growth and private sector investment.

What is the trend of capital expenditure in India?

Significant increase in central government Capex, from ₹11 trillion in 2024-25, nearly 4.5 times higher than in 2014-15. It represents 3.4% of GDP in 2024-25, up from 2% nine years earlier.

PSU capex has decreased from well above 10-11% of GDP in the 1980s to around 6-8% in recent years.

Significant rise in state government Capex, from 3.2% of GDP in 2011-12 to around 4.4% in 2022-23.

Private Sector Capex hasn’t fully recovered since the 2008 financial crisis.

For information on Capital Expenditure read here

How is capital expenditure centralized?

NHAI Funding Shift: The National Highway Authority of India, previously self-funded, now relies entirely on central government budget allocations. In 2024-25, ₹1.68 trillion of the central government’s capex is allocated to NHAI.

Railways Funding Change: Almost all railway capex for 2024-25, amounting to ₹2.52 trillion, is financed directly through the central government budget, a shift from previous years where railways partly funded their capex.

Overall Trend: This centralization reflects a structural shift in how capex is financed, increasingly moving away from PSUs and being incorporated into the central government’s budget.

Why is there an increase in state government capex?

Rising Tax Revenues: State governments have experienced strong growth in tax and non-tax revenues, boosting their fiscal capacity for capital expenditure.

GST Compensation: States received compensation from the central government for revenue losses due to the shift to the Goods and Services Tax (GST) regime.

Special Assistance Scheme: The central government’s scheme offering 50-year interest-free loans for capital investment has significantly contributed to state capex. For 2024-25, this is budgeted at ₹1.3 trillion.

How does government spending stimulate private sector investment?

Government Capex as a Catalyst: The government’s increased spending in capital projects is expected to trigger private sector investment. The hope is that government-led infrastructure development will create opportunities for private companies.

Creating Demand: By building assets like roads and bridges, the government’s capex can generate demand in related industries, encouraging private sector participation.

Healthy Corporate Balance Sheets: With high profits and stable or improving leverage, corporates are in a better position to invest. The Reserve Bank of India notes that the corporate sector’s financial health could lead to increased private investment.

Economic Environment: The government’s substantial capex is intended to create a more favorable economic environment, encouraging the private sector to take over the investment baton in the long run.

Way forward

To sustain economic growth, it’s crucial for India to maintain its increased government capex while simultaneously stimulating private sector investment. This requires balancing central and PSU expenditures and enhancing state government capex, supported by strong tax revenues and central government funding schemes.

Question for practice:

Examine the role of government capital expenditure in stimulating private sector investment in India.